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Financial Instability and the Political Economy of Trumponomics and Brexit

Paper Session

Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Anthony
Hosted By: Union for Radical Political Economics
  • Chair: Devika Dutt, University of Massachusetts-Amherst

Megabank-driven Instability and the Contradictions of Trumpian Economics

Gary Dymski
,
University of Leeds

Abstract

Accelerated financial deregulation and a regulator-sanctioned bank merger wave in the 1980s led to the emergence of “too big to manage” megabanks in the US and elsewhere. These firms’ size and complexity have made them a new source of financial instability, as the 2008 crisis dramatically demonstrated. Our paper asserts that the rise of too-big-to-fail megabanks constitutes a new source of macroeconomic disruption. Specifically, megabanks’ own balance-sheet dynamics – their evolving capital-adequacy, leverage, and liquidity conditions – now affect their credit-creation capacity, independent of external macro conditions. Further, their need for privileged access to public expenditures and to liquid reserves limits affected governments’ fiscal policy options. The Trump administration has prioritized fiscal and tax policies that will increase the US sovereign deficit, worsen the US economy’s savings deficit, and require increased capital-account inflows to achieve required macroeconomic balances. This administration has also taken an aggressive stance on trade policy, which will discourage foreign investors. These policies can be offset by backtracking on financial regulations, both Dodd-Frank and otherwise, in ways that especially privilege megabanks. This will make further catastrophic outcomes more likely and will ripple through the hyper-leveraged money markets that support the global financial balance sheets. That is, the likelihood will grow that megabank fragility will generate new rounds of macroeconomic instability. This paper uses econometric, descriptive statistical, and institutional methods to explore these dynamics for the US and UK.

The New Triffin Dilemma

Ann E. Davis
,
Marist College

Abstract

According to Pozsar (2011), there is a new kind of "Triffin Dilemma."  Due to rising inequality, a shrinking numbers of large banks, and a ceiling on FDIC insured deposits, there is a shortage of “safe assets” (Caballero 2010; Gorton 2016). The private supply of safe assets has occurred through the system of “shadow banks,” and is based on repos, or Treasury Bonds. But the supply of US Treasury bonds is limited by the ceiling on public debt, and is constrained by neoliberal theories of limits to the size of government. 

As a result, there is a presumed shortage of "safe assets," just when the levels of inequality have increased the order of magnitude of "assets under management" which are in need of protection. There are also large accumulations of cash pools by large multinational corporations, often held overseas to evade taxes. The private provision of safe assets tends to reduce liquidity and increase costs of information, potentially leading to financial instability. Possible resolutions of this issue include 1) progressive taxes to reduce the size of the cash pools, 2) an increase in the ceiling for insured deposits, and 3) increasing support by the Fed for the role of “market-maker of last resort” (Mehrling 2010). This paper will conclude with the implications of each alternative.

Decision-making and Keynesian Uncertainty in Financial Markets: Brexit as a Case Study

Eirini Petratou
,
University of Leeds

Abstract

This paper makes two contributions. Firstly, it explores the presence on fundamental uncertainty in financial markets and its impact on individuals’ trading behaviour. Secondly, it tests the initial findings in practice, after a real world uncertain phenomenon, the announcement of Brexit. This research is based on two rounds of semi-structured interviews (before-and-after-Brexit-vote) with UK-based financial traders in 2016, and a 2017 online survey designed to validate interview results.

Financial traders acknowledge the presence of fundamental uncertainty in the markets, they describe it as unquantifiable, and they view the future as not entirely predictable. In the face of these knowledge limitations, traders consistently identify risk and uncertainty as separate concepts. One key result of our before-and-after Brexit-vote interviews, consistent with previous Post Keynesian research, is that traders recognise uncertainty as a key aspect of the market context they work in. Another result of our post-Brexit evidence, however, challenges the conventional wisdom that enhanced uncertainty invariably forces traders to reduce their risk-taking: after a period of time, traders increase their risk-taking, even knowing that they are trading under conditions that remain uncertain.

Brexit and the Discreet Charm of Haute Finance

Jan Toporowski
,
University of London

Abstract

The paper examines Britain's Brexit dilemma from the point of view of Britain's position as an international financial intermediary. It reassesses critically Polanyi's concept of haute finance and argues that finance maintains social backwardness in Britain. The inability of a backward elite to modernise the economy and its institutions creates the social discontent that has been directed at Europe, and foreigners in general.
Discussant(s)
Peter Bent
,
University of Massachusetts-Amherst
Nathaniel Cline
,
University of Redlands
JEL Classifications
  • E0 - General
  • G2 - Financial Institutions and Services